Flyash is waste product of coal-fired power generation. When processed it can be used in cement manufacture. There is more flyash produced as a waste product than can be used in cement manufacture. During 2001-2006, a member of the Cement Australia group, Pozzolanic, negotiated exclusive contracts with a number of power stations in SE Queensland to acquire raw flyash. Pozzolanic supplied makers of cement and cement products. Pozzolanic’s customers were very large companies, some of which set up a joint venture company to compete with Pozzolanic for the acquisition of flyash. They and other competitive tenderers were unsuccessful. Cement Australia was at the start of the period owned by Holcim, a multinational cement company, but during the period sold down 25% to each of Hanson and Rinker, both multinational cement companies.
While the substance of the case appears to involve tying, or exclusive dealing, that issue was raised by the ACCC only in the alternative to the allegation that the defendants made and gave effect to anti-competitive agreements. As a result, considerations normally affecting exclusive dealing cases did not enter the picture, e.g. the duration of the contract and extent of foreclosure of competition having regard to alternative sources. It is recognised that when you acquire a quantity of product for your own use, competitors are automatically excluded. Although exclusive dealing was not in issue, the case turned on characterising Pozzolanic’s subjective intent in acquiring flyash.
On the face of it, one company buying flyash from several power generators, under exclusive contracts with durations of several years and different expiry dates, subject to competitive tender, and selling processed flyash to several large buyers, would appear to be in a workably competitive market.
The reasoning of the Court regarding misuse of market power raises issues of concern, even though the Court held that the ACCC failed on that issue. Misuse of market power is generally considered to address unilateral conduct, not bilateral conduct in the form of entering into agreements. Cement Australia’s economics expert was of the view that the group did not have market power at any time because of the uncertainty of contract renewal. This the Court rejected. Arguably there was no uncertainty: it is certain that contracts come to an end and the outcome of competitive tenders cannot be assured.
The Court did not question that market power can be created by exclusivity of supply. You can corner the market for, e.g. human waste, but that is of no consequence unless there are persons who will compete to buy it. Market power, the ability to charge more and give less, is generally regarded as a function of the responsiveness of buyers in the market and alternative suppliers. The Court found that the buyers in the market did not form a competitive constraint, nor did the competitors which Pozzolanic outbid in renewing its contracts to acquire flyash. The Court was apparently prepared to hold that Pozzolanic was able to maintain prices above a competitive level and stand above workable competition. It is generally considered that these are hypothetical constructs which, even if determinable, courts are not well suited to determine.
The Court was prepared to hold that Pozzolanic had market power when it entered into or renewed certain contracts. This is a necessary precursor to abuse of market power, because a party that does not have market power does not contravene the CCA by doing something that creates market power.
The issue of misuse of market power therefore turned on whether Pozzolanic had taken advantage of its market power, i.e. had done things it could not otherwise have done. This required the Court to examine evidence of 5 years’ business decisions to consider what reasons Pozzolanic had to enter into, perform and renew contracts, and whether those reasons would be rational in a workably competitive market, i.e. could have been made by a party lacking market power. These ultimately are imponderable issues. The Court appears to have found that Pozzolanic did not take advantage of its market power. However, the ACCC succeeded in that the finding of dual purposes exposed Pozzolanic and other respondents to liability in respect of anti- competitive agreements. That is, if you have good business reasons to advance your own business but concurrently one substantial reason of harming your competitors, then you have a prohibited anti-competitive purpose. This was, strictly, unnecessary to the outcome of the case given the Court found there to be an anti-competitive effect, which would alone suffice to demonstrate a contravention without, as another judge in another case suggested, a metaphysical discussion of dual purposes.
While the ACCC failed in its attempt to apply misuse of market power to bilateral rather than unilateral conduct, it may indicate that a prohibition on misuse of market power is simply too difficult to determine in a judicial forum.